IOOF to take back control of equities

Listed wealth manager
IOOF
is ­preparing to take control of a portion of its $9 billion multi-manager portfolio, which was outsourced to external fund managers including the firm’s own subsidiary, Perennial Investment Partners.

The IOOF investment committee has approved the move, which aims to save a substantial sum in asset management fees. The company plans to pass the savings on to consumers in the form of cheaper fees for managing retail superannuation and investment funds.

Under the changes, IOOF head of Australian equities Dan Farmer will manage up to 6.5 per cent of the firm’s $1.5 billion Australian equities, potentially rising to 20 per cent and with other asset classes to follow.

Perennial holds a $235 million Australian shares mandate on behalf of IOOF, along with Alliance Bernstein, Integrity Investment Management, Solaris Asset Management and new boutique Vinva Investment Management. United States fund manager Legg Mason holds a small companies mandate.

The average institutional Australian equities management fee is around 40 basis points.

All mandates are continuously reviewed, according to IOOF chief investment officer
Stephen Merlicek
, who said external managers “such as Perennial would still be in the mix".

He said the poor performance of Australian shares and the government’s proposed MySuper changes had compounded fee pressure on product manufacturers.

“Our goal is to get the best return for investors whether we outsource investment management or manage money in-house," he said. “Some of our competitors offer simple, low cost superannuation products, and we’re making changes to ensure we continue to be competitive."

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From February 1, IOOF will lower the management fees on its Multi Series Balanced Funds to 0.55 per cent, pushing the total cost of the fund including administration to 0.89 per cent.

Mr Merlicek joined IOOF in 2009 from the $11 billion corporate fund Telstra Super, where he was in charge of building its internal manufacturing capabilities. Mr Farmer was formerly Telstra Super’s senior executive for investments and local equities.

Telstra internally manages around $300 million in Australian equities, down from close to $1 billion at its height.

Mr Merlicek said IOOF had the capability and resources to successfully manage money in-house and would consider incubating boutique fund managers, or providing seed capital. Similarly at Telstra Super, Mr Merlicek established an Australian equities incubator portfolio to invest in small managers with mandates of between $10 million and $20 million. The strategy helped Telstra access high-performing managers early and at more competitive fees.

Mr Merlicek hinted that IOOF, which only invests in stock pickers, was considering investing in index funds for the first time. Another possibility is benchmarking IOOF’s funds to a tailored index, created in conjunction with its asset consultant Russell Investments.

“The performance data shows that last year active managers struggled again to beat the index, which raises questions about whether investors get value for the active management fees they pay," Mr Merlicek said.

IOOF’s decision to manage money internally is in line with industry trends. In 2010, public sector super fund QSuper brought control of its $23 billion portfolio from Queensland Investment Corporation, resulting in QIC losing its largest client and a third of its assets under advice.

Some large local super funds including the $42 billion AustralianSuper, the $30 billion UniSuper and the $4.4 billion EquipSuper, also manage money internally.